Below is information on interest rates, inflation rates, and a spot and 1-year forward exchange rate for the US dollar and the British Pound:

(Interest rates are LIBOR interbank rates ; exchange and forward rates from Investing.com; Inflation rates from The Economist, all accessed Nov. 14, 2018.)

a.) determine the future expected spot rate (Ee) that would be predicted by Uncovered Interest Parity to apply 1 year from the above snapshot. What would UIP predict to happen to the relative value of the dollar to the pound over that year?

b.) determine the future expected spot rate (Ee) that would be predicted to apply in 1 year on from the snapshot by Purchasing Power Parity. What would PPP predict to happen to the relative value of the dollar to the pound over that year?

c.) For each prediction, is the prediction a good fit for the actual forward rate indicated above? Based on your theoretical understanding of UIP and PPP (and their limitations), discuss possible reasons for any deviation of the market forward rate from the values predicted in (a) and (b).

Interest rate (1-yr bond) Inflation rate (consumer Interbank prices, latest) Spot rate Forward rate (1-yr) USD 3.12963% +2.3% 1.3023 1 GBP = $1.2778 USD GBP 1.16938% +2.4%